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    Retirement Plan Withdraws

    Submitted by Joel Shabsin, CPA

    On June 18th, the IRS issued guidance with Notice 2020-50 related to the CARES Act provisions for retirement plan withdrawals.

    The CARES Act allows individuals affected by the Corona-19 virus to take distributions or loans from their IRA, their 401(k) or 403(b) of up to $100,000 and receive favorable tax treatment. These distributions are not subject to the 10% early withdrawal penalty and can be treated as a rollover if the funds are replaced within a 3 year period. Taxes are paid on 1/3 of the
    withdrawal amount in 2020, 2021 and 2022.

    The notice does 2 things. First it expands the definition of who is eligible to take a Corona-19 distribution and secondly how to treat the reporting of the distributions and repayments over the next 3 years.

    A qualified individual is anyone who:

    • Is diagnosed or whose spouse or dependent is diagnosed with the Covid-19 virus by a test approved by the Centers for Disease Control and Prevention or
    • Experiences adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household being quarantined, furloughed or laid off or
    • Have their work hours reduced due to Covid-19 or
      • Are unable to work due to a lack of child care because of Covid-19, closing or
    • Have reduced hours of a business that they own or operate due to Covid-19 or
    • Have pay or self employment income reduced due to Covid-19 or
    • Have a job offer rescinded or start date for a job delayed due to Covid-19

    Reporting treatment of qualified distributions

    You would think that the reporting and paying the taxes on the qualified distributions would be simple but there are 10 pages of rules for the Custodian and the recipient. The custodian in Box 7 of the 1099R form, has the option of coding the distribution with either a code 1, (early distribution, no known exception) or code 2 (early distribution, exception applies) even if the recipient repays the full amount in the 2020 year. So be aware that for anyone coming in with a 1099R showing a code 1 or code 2 in Box 7 and tells you it was a Qualified Corona-19 distribution, there are questions you need to ask to make sure the individual was qualified to take the distribution.

    If they are qualified they are entitled to the following favorable tax treatment by reporting the distribution on the taxpayer’s 2020 federal income tax return and on a new form, 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments, which the IRS says will be available sometime before the end of the year:

    1. The 10% early withdrawal penalty (including the 25% additional tax for SIMPLE IRA’s) does not apply.
    2.  The distribution is permitted to be included in income ratably over the 2020, 2021 and 2022 tax years.
    3. Repayments are not considered rollovers for the one rollover per year rule for retirement accounts, so multiple repayments may be made each year.
    4. The qualified individual is permitted to recontribute any portion of distribution that is eligible for tax free rollover treatment, within the 3 year period beginning on the day after the date on which the distribution was received and the recontribution will be treated as if it were paid in a trustee-to-trustee transfer to an eligible retirement plan.

    The notice has 5 pages of examples ranging from ratable repayments each year to multiple uneven repayments during the 3 year period to no repayments. The timing of any repayment, if any, determines the amount of the distribution that has to be included in taxable income for each year. Repayments made before the due date of the return with extensions and before the return is filed, apply against the taxable portion of the distribution for the tax return year. For example, if your client takes a $75,000 distribution on December 15, 2020 and elects to spread it out over the 2020, 2021 and 2022 tax year, he/she would have to report $25,000 of income in each of the 3 years. If they don’t make any repayments in 2020 or 2021, but make a $25,000 repayment on April 12, 2022, before they file their 2021 tax return, they would be able to use the 2022 payment to offset the $25,000 of 2021 income on their 2021 return. If, instead of repaying $25,000 the client repays $40,000 on April 12, 2022, they have an overpayment of $15,000 for the year which they can elect to either carry forward to the 2022 return or amend their 2020 return to show a $15,000 repayment as a result of the overpayment in 2022 and reducing their taxable income for 2020 by the $15,000.

    In effect, because of the timing rules and the ability to extend the due date of the 2022 return to October 15, 2023, a qualified individual could take a corona virus distribution on July 15, ,2020 and not have to repay it until October 14, 2023. For example, the individual taking a $75,000 qualified distribution would have to include $25,000 in income on their 2020, 2021 and 2022 tax returns. They would pay the tax on the $25,000 in 2020 and again in 2021. If they extend their return for 2023 and repay the full $75,000 on October 14, 2023, they would pay no tax on the $25,000 of income required to be reported on their 2022 return and would have a $50,000 carryback to 2020 ($25,000) and to 2021 ($25,000). They would have to amend their 2020 and 2021 returns to take advantage of the carryback.

    The notice does point out that if the taxpayer dies before the full taxable amount is included in income, the remainder must be included in gross income for the year that includes the individual’s death.

    If you have individual clients who took a corona virus related distribution from a retirement plan or an IRA, you need to download Notice 2020-50 and read through it. If you have business clients with employees who took a corona virus related distribution, you need to download Notice 2020-50 and read through it. If clients took loans from their retirement plans under the new corona virus regulations in the CARES Act, you need to download Notice 2020-50 and read through it. The notice is full of information you’ll need if you encounter 1099R forms with a code 1 or code 2 in box 7 and you find out that it was for a corona virus distribution. Its 19 pages long and written in readable English, not the normal legalese you’d expect to find in IRS notices. Plus it gives examples of how to determine the taxable amount of the distribution for each of the 3 years including such things as carryforwards and carrybacks if repayments in one year exceed 1/3rd of the distribution amount.

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